THE ECONOMIC & THE ECONOMIC & MARKET OUTLOOKMARKET OUTLOOK
MORTGAGE EVENT 2006MORTGAGE EVENT 2006
Martin Ellis
Chief Economist
UK Economy:UK Economy:
growth is improving …growth is improving …
H
GDP Growth
0
1
2
3
4
5
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
% C
hang
e
0
1
2
3
4
5
% C
hang
e
% quarter on quarter % year on year
Source: ONS and Datastream
UK Economy:UK Economy:
inflation & interest rates are edging up …inflation & interest rates are edging up …
H
Inflation and Interest Rates
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
2000 2001 2002 2003 2004 2005 2006
%
CPI Annual % Change Bank of England Official Lending Rate
Source: Bank of England and ONS
UK Economy:UK Economy:
prospects …prospects …
• Growth to be around long-term average over next 12 months.
• More balanced growth – less dependent on the consumer.
• Interest rates to rise but not dramatically.
H
Household Finances:Household Finances:debt : income ratiodebt : income ratiostill rising …still rising …
H
Debt: Income
70
80
90
100
110
120
130
140
150
160
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
% o
f Ann
ual D
ispo
sabl
e In
com
e
Source ONS and Bank of England
Household Finances: Household Finances:
income gearing below early 90s levels …income gearing below early 90s levels …
H
Income Gearing
0
5
10
15
20
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Repaym
ents
as %
of D
isposable
Incom
e
Interest and mortgage repayments Interest only
Sources: ONS and Bank of England
Household Finances:Household Finances:
wealth rising more quickly than debt …wealth rising more quickly than debt …
H
£ Billion
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Wealth Debt
Source: ONS and Bank of England
Household Finances: Household Finances:
mortgage arrears remain low …mortgage arrears remain low …
H
UK lenders' arrears on domestic mortgage lending
0.0
0.5
1.0
1.5
2.0
2.5
88 H
1
89 H
1
90 H
1
91 H
1
92 H
1
93 H
1
94 H
1
95 H
1
96 H
1
97 H
1
98 H
1
99 H
1
00 H
1
01 H
1
02 H
1
03 H
1
04 H
1
05 H
1
06 H
1
%
6 - 12 months in arrears More than 12 months in arrears
Source: CML
Household Finances:Household Finances:
overview …overview …
• Employment levels are high.
• Strong household sector balance sheet.
• Homebuyers are putting down bigger deposits than in previous cycles.
• Arrears and repossessions remain low.
The UK housing market:The UK housing market:
house price inflation is moderating …house price inflation is moderating …
House Prices
-15-10-505
10152025303540
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Annual %
Change
Source: Halifax Plc
H
The UK housing market: The UK housing market:
turnover has recovered …turnover has recovered …
H
Housing Transactions
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
95 96 97 98 99 00 01 02 03 04 05 06
Num
ber
Source: Land Registry
The UK housing market : The UK housing market :
supply shortages …supply shortages …
H
Ratio of sales to unsold stock
0
10
20
30
40
50
60
70
80
90
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: RICS
The UK housing market:The UK housing market:
north/south divide widening again?north/south divide widening again?
H
North/South Divide
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
83 85 87 89 91 93 95 97 99 01 03 05
Ratio
Source: Halifax
UK housing market prospects:UK housing market prospects:
strong fundamentals …strong fundamentals …
H
Employment and Unemployment
23,000
24,000
25,000
26,000
27,000
28,000
29,000
30,000
1990 1992 1994 1996 1998 2000 2002 2004 2006
Em
plo
ym
ent R
ate
(000's
)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Cla
imant C
ount (0
00's
)
Employment Level Claimant Count
Source: ONS
UK housing market prospects:UK housing market prospects:
but constraints exist …but constraints exist …
• Pressure on households’ discretionary income from substantial utility bill rises and above inflation council tax increases.
• Speculation of interest rate rises and recent upward movement in variable and fixed rate mortgage pricing.
• High house prices in relation to earnings.
H
Mortgage Market: Mortgage Market:
pick-up in house purchase loans …pick-up in house purchase loans …
H
House Purchase and Remortgages
0
50
100
150
200
250
300
350
400
450
98 99 00 01 02 03 04 05 06
Num
ber
(000's
)
Loans for House Purchase Remortgages
Source: Bank of England
Mortgage Market: Mortgage Market:
fixed rate lending remains high …fixed rate lending remains high …
H
Fixed and Variable Rates
0
10
20
30
40
50
60
70
80
90
Jun-02 Jun-03 Jun-04 Jun-05 Jun-06
% o
f fix
ed a
nd v
ariable
rate
s
Fixed Rate Variable Rate
Source: CML and Bank of England
Mortgage Market: Mortgage Market:
but fixed rates are less attractive …but fixed rates are less attractive …
H
Fixed and Variable Rates
3.03.5
4.04.5
5.05.5
6.06.5
7.07.5
Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06
%
2 year fixed rate 95% LTV Variable Rate 95% LTV
Source: Bank of England
ConclusionsConclusions
• Economy back to long-term historical average and in good health.
• Interest rates rising but not dramatically.
• Income shocks that caused difficulties in early 1990s not to be repeated so downside risks highly unlikely to materialise.
• Stable housing market.
H